Since the start of the war, government spending has increased dramatically, causing a significant expansion of the budget deficit and the need to finance it. Over the last year until September 2025, Ukraine's state budget deficit, excluding foreign grants, amounted to 22.9 percent of GDP. It was 1 percentage point of GDP less than the 2024 deficit and 3.7 percentage points less than the 2023 deficit (see Table 1). However, the planned budget deficit for 2025 is set at 24.3 percent of GDP, which will lead to a slight increase in the deficit by the end of the year.
In 2026, according to the draft budget, the deficit is expected to decrease to 18.8 percent of GDP. Thus, after some growth in the budget deficit this year, there is hope for its reduction next year. However, by the standards of peaceful economies, Ukraine's public finances remain deeply deficient.
Table 1. Ukraine's state budget deficit in 2023–2026, % of GDP
Among the recent positives is an increase in the degree of self-sufficiency of public finances as a result of revenue growth outpacing expenditure growth. The ratio of budget revenues, excluding grants, to budget expenditures and debt servicing reached 59.2 percent in the first eight months of 2025, compared to 47.4 percent in 2024.
However, even with the increase in its own budget revenues, the government still had a significant need to borrow. The main reason for this is the growth in defense spending due to the continuing high intensity of hostilities and the reduction in US military aid. In 2025, Ukraine received only the remnants of the $60 billion aid package approved under President Biden. For 2026, the Pentagon's budget for aid to Ukraine is likely to provide only $0.4 billion.
That is why defense spending in the 2025 budget is growing significantly, reaching UAH 1.53 trillion in January-July (compared to UAH 1.14 trillion in the same period of 2024). Of these expenditures, UAH 651 billion has been allocated for the development, procurement, modernization and repair of weapons, military equipment and supplies, compared to UAH 466 billion for the first seven months of 2024. The draft law “On the State Budget of Ukraine for 2026” provides for a total of UAH 2,805.8 billion, or 27.2 percent of GDP, for national security and defense.
According to Roksolana Pidlasa, chair of the parliamentary budget committee, total military spending (including aid from international partners) will amount to $106 billion in 2025. In 2026, there are plans to increase this figure to $120 billion, with about half of this amount to be financed from Ukraine's state budget. As beneficial as the implementation of these plans may be, even if they are put into practice, our military budget would still lag significantly behind that of the aggressor, amounting to over $200 billion (the author's estimates are given here).
The state budget deficit in absolute terms in 2026 will be almost equal to the planned figure for 2025 (see Table 2). Gross borrowing for the budget will also remain stable. The law on amendments to the 2025 budget of July 31 increased the plan for domestic borrowing by UAH 185 billion. Thus, the total plan for government loans for 2025 has been brought to UAH 2.51 trillion, of which UAH 0.76 trillion is domestic loans. In 2026, according to the draft budget, the total amount of government borrowing will be UAH 2.54 trillion, of which UAH 0.42 trillion will be domestic borrowing.
Table 2. State budget deficit and sources of its financing in 2023–2026, UAH billion
Actual government borrowing to the general fund of the budget in January–August 2025 amounted to UAH 1.24 trillion. Domestic loans amounted to UAH 345.5 billion. External sources provided $21.4 billion, of which $13.3 billion came from the G7 countries under the ERA plan. Among external donors, the largest resources were provided by the European Union (EUR 6.14 billion—Ukraine Facility and EUR 9.0 billion—ERA Loan), the United States ($5.7 billion—ERA), Canada ($3.4 billion—ERA), the IMF ($0.9 billion—EFF) and Japan ($0.2 billion—ERA).
Since the government receives most of its financial assistance in the form of loans, large-scale external financing is accompanied by a rapid increase in public debt. As of July 31, 2025, public and publicly guaranteed debt reached UAH 7.77 trillion. The dollar equivalent of the debt has almost doubled since February 2022: from $95.4 billion to $186.1 billion. Currently, external debt accounts for 75 percent of the total debt, while domestic debt accounts for 25 percent.
In 2025, the annual budget law provides for UAH 1.1 trillion to be allocated to debt repayment and servicing. In 2026, this amount is expected to increase to UAH 1.17 trillion. In 2025, the percentage of consolidated budget revenues used for debt payments stood at 30.4 percent. However, these indicators are characteristic of the pause in repayment and servicing of part of the external obligations, which creditors agreed to in 2022.
It is evident that after this pause ends in 2027, Ukraine's debt servicing payments will increase dramatically. Such changes will inevitably lead to budget reallocations, undermining defense and social spending as well as post-war recovery programs in general.
The relative size of the national debt during the war increased from 48.9 percent of GDP at the end of 2021 to 91.2 percent of GDP at the end of 2024. At the beginning of August this year, the debt-to-GDP ratio was 92 percent. The draft budget for 2026 contains information on the expected size of public debt at the end of next year—UAH 10.93 trillion, or 106 percent of GDP.
However, it should be noted that Ukraine's official public debt statistics do not include all of the government's debt obligations, and therefore the actual amount of public debt is likely to be higher than the aforementioned UAH 7.77 trillion, or 92 percent of GDP.
Firstly, the national debt does not include a $3.9 billion loan from the US in 2024. At that time, according to the Ukraine Security Supplemental Appropriations Act (USSAA), $7.85 billion in budget support to Ukraine was provided in the form of a loan, half of which was subsequently written off by President Joe Biden in November 2024. The other half is either to be written off in January 2026 or repaid by the Ukrainian government over 40 years. The statements and actions of Donald Trump's administration do not inspire optimism about the possibility of writing off the remainder of this loan.
Secondly, the ERA (Extraordinary Revenue Acceleration) Loan is officially a loan, but when the funds are received, new obligations are not usually reflected in Ukraine's public debt. The exception is €9 billion in EU funds in the form of exceptional macro-financial assistance, which has already been included in the government's debt obligations.
Currently, each participant in the ERA plan (Canada, Japan, the EU, the UK and the US) has its own mechanism for financing Ukraine, with a total of $49.2 billion in available funds. The Ukraine Loan Cooperation Mechanism (ULCM), established by EU institutions, will provide Ukraine with non-repayable financial assistance for many years to repay ERA loans from the income received by EU depositories from frozen Russian assets. The detailed mechanism is defined by the Regulation of the European Parliament and the Council of the EU of October 24, 2024, treaties concluded by Ukraine and agreements with the EU.
The danger here is that if the depositories' income from these assets is insufficient or if they are transferred to the aggressor (which was already discussed as one of the options for a peaceful settlement in early 2025), ERA loans will be repaid from the Ukrainian budget. Ukraine receiving compensation from Russia for the damage caused will lead to the same result. One of the documents of the 2026 draft budget states: “The terms of the transactions... provide for a limited right of creditors to demand repayment of loans from the state... at the expense of the state budget of Ukraine in the event of compensation (reimbursement) to the budget for damage caused as a result of Russia's armed aggression against Ukraine.”
In August 2025, the government's liabilities on ERA loans had already reached $25.6 billion. A significant portion of this amount is classified as contingent liabilities of the government, which are not considered debt. According to IMF estimates, proceeds from the ERA Loan will amount to $35.9 billion in 2025, $11 billion in 2026 and $1.3 billion in 2027. A small portion of these funds, subject to the agreement of donors, may be used to purchase weapons and equipment for the Armed Forces of Ukraine.
When analyzing Ukraine's debt sustainability, the IMF uses the indicator of public and publicly guaranteed debt, including borrowings from the ERA Loan. That is why the projected public debt figures in the IMF tables are higher than those in Ukraine. In particular, the IMF forecasts that Ukraine's public debt will reach 108.6 percent of GDP at the end of 2025 under the baseline scenario and 122.5 percent of GDP under the downward scenario. By the end of 2026, the debt level will be 110.4 percent of GDP under the baseline scenario and 131.7 percent of GDP under the downward scenario.
In 2025, donors' financial commitments will fully cover Ukraine's budgetary needs in terms of non-military expenditures. The budget financing plan for 2025 provides for the attraction of $52.9 billion to the general and special funds in the form of foreign loans and grants, with a partial transfer of accumulated resources to 2026. In particular, EU funding from the Ukraine Facility is expected to amount to €12.5 billion, or $13.6 billion, with proceeds from the ERA Loan amounting to $34.2 billion, including $10.6 billion from the US. A total of $3.1 billion is expected to come from the IMF and the IBRD.
Next year, the situation with external budget financing will become more tense. The need to attract external loans and grants to cover budgetary needs (according to the draft budget for 2026) will amount to about $45 billion. At the same time, the current financial commitments of foreign donors are significantly lower, totaling only $25.8 billion (see Table 3).
Table 3. Planned volumes of external financial assistance to Ukraine for 2025 and 2026, in billions of US dollars
Thus, a foreign financing gap of approximately $19 billion is projected for 2026. Transition payments from 2025 borrowings will narrow this gap somewhat but will not close it completely. There are gaps on the part of partners, mainly due to the fact that all reputable forecasters, including the IMF, predicted the end of the Russian-Ukrainian war in the last months of 2025. Even during the eighth review of the IMF program in June 2025, the baseline scenario of the macroeconomic program was based on the assumption that the war would end by the end of 2025, while the downside scenario extended this horizon to mid-2026.
However, the most pessimistic politico-military scenarios of a few months ago now look optimistic. The harsh realities are forcing the government to include in the 2026 budget the continuation of Ukraine's military and defense operations until the end of next year, with the formation of adequate plans for financing defense and social programs.
Unfortunately, the existence of critical needs for the state during an armed conflict with an aggressor does not guarantee their automatic financing from outside sources. Ongoing negotiations with the European Commission on a new reparations loan for Ukraine and a new loan program with the IMF offer a chance to cover part of the financial gap in 2026. However, it is unlikely that these instruments alone can completely eliminate the gap. Therefore, in the near future, the Ukrainian authorities' unconditional priorities should include active diplomatic work with potential donors and the search for new allies to counter the invader and the key threat to European security in the 21st century.